ALL YOU NEED TO KNOW ABOUT TREASURY BILLS
For most investment-minded Nigerians, treasury bills are popular. This is mostly because it is a safe financial market instrument and security to hold. To the Central Bank of Nigeria (CBN), a treasury bill is a monetary policy instrument that the Federal Government of Nigeria uses mainly to regulate inflation. They use it to keep in check the amount of money flowing in the economy at a particular time; either to increase it, or to reduce it, depending on which is needed. Since the aim of this article is to explain clearly what T-bills are, let me first explain what monetary policy and inflation are.
What is Monetary Policy?
Monetary policy is a Central Bank's action and communication that manages the money supply in the country. That includes credit, cash, checks, and moneymarket mutual funds. The most important of these forms of money is credit. It includes loans, bonds, and mortgages. Monetary policy increases liquidity to create economic growth.
Monetary policy rate is given by the CBN's Monetary Policy Committee (MPC), and defines the lending rate at which banks can transact with the CBN. Currently, the rate is 13.5%. Banks can take loans from the CBN at this rate and in turn give loans to customers at a higher rate in order to make some profit. This is why most bank loans in Nigeria are generally not accessible at low rates, and cannot be accessible at single digit either.
Monetary policy is a Central Bank's action and communication that manages the money supply in the country. That includes credit, cash, checks, and moneymarket mutual funds. The most important of these forms of money is credit. It includes loans, bonds, and mortgages. Monetary policy increases liquidity to create economic growth.
Monetary policy rate is given by the CBN's Monetary Policy Committee (MPC), and defines the lending rate at which banks can transact with the CBN. Currently, the rate is 13.5%. Banks can take loans from the CBN at this rate and in turn give loans to customers at a higher rate in order to make some profit. This is why most bank loans in Nigeria are generally not accessible at low rates, and cannot be accessible at single digit either.
What is Inflation?
When there is more money in the system pursuing few goods for purchase, the prices of the goods will rise. This follows the law of demand and supply. A high supply of currency/money in the system will lead to a higher demand on goods and services (because people have a lot of cash to buy them), leading to an increase in the prices of those goods and services. In a nutshell, when there is more money in circulation than the actual cost of living, this will drive up the prices of goods and services since there's so much cash in circulation to buy them. So, inflation is when the proportion of money in the system is much more than what is needed for living. When that proportion is too high, inflation will be high, and vice versa.
When there is more money in the system pursuing few goods for purchase, the prices of the goods will rise. This follows the law of demand and supply. A high supply of currency/money in the system will lead to a higher demand on goods and services (because people have a lot of cash to buy them), leading to an increase in the prices of those goods and services. In a nutshell, when there is more money in circulation than the actual cost of living, this will drive up the prices of goods and services since there's so much cash in circulation to buy them. So, inflation is when the proportion of money in the system is much more than what is needed for living. When that proportion is too high, inflation will be high, and vice versa.
Often, when this proportion is too high at a give time, and there is too much money in circulation, the CBN uses a measure to reduce or mop-up cash from the system. One of such measures is by issuing Treasury Bills.
The CBN's Monetary Policy Committee discusses inflation at their regular meetings held every quarter and comes up with the monetary policy rate to guide all monetary transactions in such a manner as to control inflation.
The CBN's Monetary Policy Committee discusses inflation at their regular meetings held every quarter and comes up with the monetary policy rate to guide all monetary transactions in such a manner as to control inflation.
What are Treasury Bills?
A treasury bill is a security which the federal government auctions in exchange for cash from an investor, with a guarantee to pay back at a fixed rate and time. The money goes to the government's treasury at the CBN, hence the name treasury bill. Because it is guaranteed by government, it is a low-risk investment. This means that the investor will not get his money back only in the event that the country's economy COMPLETELY collapses. In other words, they are backed by the full faith of the government. In fact, the government can print more currency in order to meet up with this obligation if the situation demands it.
Hence, treasury bills are issued by the federal government through auctions conducted by the CBN. They are the most risk-free investment anyone can make because the government cannot owe or not pay. Sometimes, if the situation demands it, the government can even print more Naira notes in order to pay the investors back.
A treasury bill is a security which the federal government auctions in exchange for cash from an investor, with a guarantee to pay back at a fixed rate and time. The money goes to the government's treasury at the CBN, hence the name treasury bill. Because it is guaranteed by government, it is a low-risk investment. This means that the investor will not get his money back only in the event that the country's economy COMPLETELY collapses. In other words, they are backed by the full faith of the government. In fact, the government can print more currency in order to meet up with this obligation if the situation demands it.
Hence, treasury bills are issued by the federal government through auctions conducted by the CBN. They are the most risk-free investment anyone can make because the government cannot owe or not pay. Sometimes, if the situation demands it, the government can even print more Naira notes in order to pay the investors back.
Treasury bills are often used by government to fund the budget, buy Euro bonds, fund critical infrastructure, etc.
How do Treasury Bills work for the Federal Government?
The Federal Government of Nigeria, through the CBN, offers treasury bills to investors at an auction. A total volume (amount) will be on offer at a fixed interest rate, and tenure(s) will be defined also.
So, interested investors will be required to place their bids. Successful bids will be selected and their monies sent into the treasury account at the CBN.
If there is so much money in the system, government, through the CBN, may offer a higher volume for bidding (in order to mop up more cash from the system) at lower rates (so as not to encourage inflation when they will be paying the investors back).
But if there is little money in the system, they may sell a lower volume of bids at higher rates (to be able to push more money back into the system when they will be paying investors back).
The Federal Government of Nigeria, through the CBN, offers treasury bills to investors at an auction. A total volume (amount) will be on offer at a fixed interest rate, and tenure(s) will be defined also.
So, interested investors will be required to place their bids. Successful bids will be selected and their monies sent into the treasury account at the CBN.
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| CBN Headquarters, Abuja FCT |
If there is so much money in the system, government, through the CBN, may offer a higher volume for bidding (in order to mop up more cash from the system) at lower rates (so as not to encourage inflation when they will be paying the investors back).
But if there is little money in the system, they may sell a lower volume of bids at higher rates (to be able to push more money back into the system when they will be paying investors back).
How are Treasury Bills Sold?
Treasury bills are sold to the public at an auction by the federal government at the CBN every two weeks. There are two (2) markets in which treasury bills are sold:
1. Primary Market: In this market, investors bid for treasury bills during auctions held by the CBN. To do this, investors often go through investment banks, insurance companies, investment houses, commercial banks, etc, as intermediaries. To send a bid directly to the CBN in this market, an investor must have a minimum of N50 million to invest. However, investors with lower amounts (minimum of N100,000) can also bid through their banks. What banks usually do is to pool these lower amounts brought by multiple investors to make a larger fund of at least N50 million and then place a bid on their behalf.
The primary market bidding process holds every two weeks Wednesday. Nigeria's Debt Management Office (DMO) monitors these bids and you can view bid summaries here. Bids placed by an investor can fail at the CBN's discretion. Tenure in this market is fixed and determined by the CBN; investors cannot alter it without a penalty on their investments. Current tenures are 91 days, 182 days, and 364 days for 9.7%, 11.35% and 12% rates respectively.
However, there are two rates in this market; Bank rate and personal bidding rate. The bank (or investment house) can negotiate a rate with the CBN for all investment bids that they are serving as intermediaries for. This is called bank rate. Alternatively, an investor can specify a particular rate on his bid, which may or may not be approved by the CBN (this is mainly for investors with large amounts of up to N50 million). This is the personal bidding rate. The CBN reserves the right to consider all bids, and to either accept or reject any at their own discretion.
In this market also, if your bid is successful, you can choose to collect your interest upfront, or you can choose to collect it at the end of the tenure. If you choose the later, you will get more profits because you will get interest on both your principal, as well as interest on the interest of your principal. For example, if you placed a successful N1 million bid at 12%, you can choose to collect N120,000 interest on your principal at the beginning of the tenure, and get your principal back at the end, totaling N1,120,000. But if you choose to leave the interest till the end of the tenure, you will get N1 million + N120,000 + N14,400 = N1,134,400. This is applicable in the secondary market also.
Treasury bills are sold to the public at an auction by the federal government at the CBN every two weeks. There are two (2) markets in which treasury bills are sold:
1. Primary Market: In this market, investors bid for treasury bills during auctions held by the CBN. To do this, investors often go through investment banks, insurance companies, investment houses, commercial banks, etc, as intermediaries. To send a bid directly to the CBN in this market, an investor must have a minimum of N50 million to invest. However, investors with lower amounts (minimum of N100,000) can also bid through their banks. What banks usually do is to pool these lower amounts brought by multiple investors to make a larger fund of at least N50 million and then place a bid on their behalf.
The primary market bidding process holds every two weeks Wednesday. Nigeria's Debt Management Office (DMO) monitors these bids and you can view bid summaries here. Bids placed by an investor can fail at the CBN's discretion. Tenure in this market is fixed and determined by the CBN; investors cannot alter it without a penalty on their investments. Current tenures are 91 days, 182 days, and 364 days for 9.7%, 11.35% and 12% rates respectively.
However, there are two rates in this market; Bank rate and personal bidding rate. The bank (or investment house) can negotiate a rate with the CBN for all investment bids that they are serving as intermediaries for. This is called bank rate. Alternatively, an investor can specify a particular rate on his bid, which may or may not be approved by the CBN (this is mainly for investors with large amounts of up to N50 million). This is the personal bidding rate. The CBN reserves the right to consider all bids, and to either accept or reject any at their own discretion.
In this market also, if your bid is successful, you can choose to collect your interest upfront, or you can choose to collect it at the end of the tenure. If you choose the later, you will get more profits because you will get interest on both your principal, as well as interest on the interest of your principal. For example, if you placed a successful N1 million bid at 12%, you can choose to collect N120,000 interest on your principal at the beginning of the tenure, and get your principal back at the end, totaling N1,120,000. But if you choose to leave the interest till the end of the tenure, you will get N1 million + N120,000 + N14,400 = N1,134,400. This is applicable in the secondary market also.
2. Secondary Market: In this market, commercial banks and investment fund houses who have already bought large volumes of treasury bills directly from the CBN at primary market rates sell smaller volumes to interested investors at lower rates to make some more profit. This encourages participation in T-bills after CBN auction has closed. For example, Bank A which has successfully bidded and won treasury bills of N100 million at 12% could sell N5 million worth of the T-bills to XYZ company at 9% and/or N250,000 worth of the bills to one Mr. Okeke at 10%.
Bids don't fail in the secondary market because there is in effect no bid but rather an offer from the bank which you either accept or reject. Also, tenure is more flexible and negotiable between you and the bank. Minimum investment in this market is N100,000.
How profitable are Treasury Bills?
The profitability of any investment can be measured by comparing the interest rate it yields to the inflation rate. As at July 2019, the CBN pegged inflation in Nigeria at 11.02%. If this rate increases at any time, the Nigerian naira loses its value by the margin of increase. So, inflation is used to measure the strength of a currency (its purchasing power) overtime with respect to the prices of goods and services. Therefore, a profitable investment is one that yields a higher interest rate than inflation because in that case, your money will still have value that covers up for the loss in value of the naira. Simply put, investing in a business or security that offers less than 11.02% means that your money will be depreciating as the business is running, and you'll end up with a profit that's lower in value (quality) than what you invested (though higher in quantity). You should invest at rates higher than 11.02% in order to preserve and scale-up the value of your money overtime.
The profitability of any investment can be measured by comparing the interest rate it yields to the inflation rate. As at July 2019, the CBN pegged inflation in Nigeria at 11.02%. If this rate increases at any time, the Nigerian naira loses its value by the margin of increase. So, inflation is used to measure the strength of a currency (its purchasing power) overtime with respect to the prices of goods and services. Therefore, a profitable investment is one that yields a higher interest rate than inflation because in that case, your money will still have value that covers up for the loss in value of the naira. Simply put, investing in a business or security that offers less than 11.02% means that your money will be depreciating as the business is running, and you'll end up with a profit that's lower in value (quality) than what you invested (though higher in quantity). You should invest at rates higher than 11.02% in order to preserve and scale-up the value of your money overtime.
How to buy Treasury Bills
To invest in treasury bills, it is best to go to any branch of your bank and ask to be guided on the process. But, generally, it involves filling out some forms and writing a mandate letter, amongst other things that may be required by the bank or investment House.
How to calculate the yield of your Treasury bill.
For example, if you invest N1 million in treasury bills at 10.50% rate for 364 days, and have chosen to collect your interest at the beginning of the tenure, you can calculate the yield thus:
First, calculate the amount that 10.50% of N1 million will give. This means 0.105 x 1,000,000 = N105,000.
Then multiply this amount by a factor which is the tenure of your investment (in days) divided by 364 days. That is,
N105,000 x 364/364 = N105,000.
This means that your investment will yield N105,000, totaling N1,105,000.
NOTE: When you invest this money, you will be paid this yield upfront. Then, at the end of the tenure, you'll get your principal back, totaling N1,105,000.
Similarly, if you invest the same amount but for 182 days at the same rate, the yield will be: N105,000 x 182/364 = N52,500, totaling N1,052,500.
But if you invest the same amount for 91 days at the same rate, the yield will be: N105,000 x 91/365 = N26,250, totaling N1,026,250.
Remember that these yields will be higher if you do not collect your interest at the beginning of the tenure. If you choose to collect your interest at the end of the tenure, the yields will be N1,116,025, N1,058,012.50, and N1,029,006.25 respectively.
However, please note that if the tenure changes, the rate should change. You should use the new rate to calculate a new amount based on which you will calculate the correct yield.
To invest in treasury bills, it is best to go to any branch of your bank and ask to be guided on the process. But, generally, it involves filling out some forms and writing a mandate letter, amongst other things that may be required by the bank or investment House.
How to calculate the yield of your Treasury bill.
For example, if you invest N1 million in treasury bills at 10.50% rate for 364 days, and have chosen to collect your interest at the beginning of the tenure, you can calculate the yield thus:
First, calculate the amount that 10.50% of N1 million will give. This means 0.105 x 1,000,000 = N105,000.
Then multiply this amount by a factor which is the tenure of your investment (in days) divided by 364 days. That is,
N105,000 x 364/364 = N105,000.
This means that your investment will yield N105,000, totaling N1,105,000.
NOTE: When you invest this money, you will be paid this yield upfront. Then, at the end of the tenure, you'll get your principal back, totaling N1,105,000.
Similarly, if you invest the same amount but for 182 days at the same rate, the yield will be: N105,000 x 182/364 = N52,500, totaling N1,052,500.
But if you invest the same amount for 91 days at the same rate, the yield will be: N105,000 x 91/365 = N26,250, totaling N1,026,250.
Remember that these yields will be higher if you do not collect your interest at the beginning of the tenure. If you choose to collect your interest at the end of the tenure, the yields will be N1,116,025, N1,058,012.50, and N1,029,006.25 respectively.
However, please note that if the tenure changes, the rate should change. You should use the new rate to calculate a new amount based on which you will calculate the correct yield.
In addition, banks also charge treasury bill custody fee which differs from bank to bank. Its a small amount ranging from 0.35% and below. Banks also give an automatic roll over option to investors in the primary market only. So you can mandate your bank to roll over your principal plus profits to place a new bid for you.
Disadvantage of Treasury bills
If you terminate your investment before maturity, you will be paid at a discounted rate which could include all of your interest plus a part of your capital. This is for both primary and secondary markets.
In the meantime, the federal government has just auctioned N208 billion treasury bills at the CBN's primary market auction. See details here.
Mr Arinze Onugha and Mr Felix Okwaraoha, both Bankers, as well as Mr Mojeed Ibrahim, a Finance Manager contributed to this article.
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